A year in review: levelling the field with the EU's Foreign Subsidies Regulation

On 12 July 2023, the Foreign Subsidies Regulation (FSR) entered into force. The introduction of the regulation and all subsequent developments sparked a flurry of commentaries and articles. But what concrete results did it produce? We examine what the European Commission (Commission) achieved in the first year of FSR enforcement and what lies ahead.

FSR: background

The FSR aims to protect the European internal market from distortions caused by foreign subsidies granted by non-EU governments to companies operating in the EU. Prior to this regulation, there was a regulatory gap in the EU rulebook: while support measures from EU Member States must be in line with EU State aid rules, the EU did not have similar rules in place to ensure a level playing field concerning financial aids from third countries. Therefore, the FSR was introduced to implement a legal framework to redress this imbalance. It is seen as a next step towards the completion of the EU single market. 

The Commission enforces the FSR, using a wide range of investigative powers, similar to those used to enforce EU antitrust rules. Companies must notify the Commission of any concentration and bid in a public procurement procedure that exceeds thresholds on the turnover of the companies involved or the bid's value, and the total amount of financial contributions received by the company from third countries. Besides the notification requirements, the Commission has the discretion to investigate an economic activity if there are sufficient indications of the existence of potentially distortive foreign subsidies. This 'ex officio' investigation tool also allows the Commission to investigate completed concentrations in cases which did not meet the notification thresholds. Once the Commission has completed an in-depth investigation, it can impose a variety of measures through a formal decision. These measures can include the dissolution of a merger, the exclusion from a public procurement procedure or the imposition of behavioural remedies. 

One year of FSR enforcement 

So far, the Commission launched five in-depth investigations under the FSR. Three of these investigations concern the notification of a bid in a public tender, while one relates to the notification of a concentration. The Commission also conducted one dawn raid. The common denominator among all these cases is that they concern specific sectors that align with the EU's strategic objectives.

Bulgarian electric trains

On 16 February 2024, the Commission announced the launch of its first in-depth investigation. This concerned the notification of a bid in a Bulgarian public tender for the production and maintenance of electric trains, submitted by a subsidiary of the Chinese state-owned CRRC cooperation. Allegedly, the Commission had sufficient indications that subsidies from the Chinese government allowed the company to submit an unduly advantageous offer. However, the details remain unknown as the Commission ended the investigation when CRRC's subsidiary withdrew its bid on 26 March 2024.

Romanian solar park

The Commission launched another two in-depth investigations on 3 April 2024, into the notifications of bids submitted in a public tender for the development and operation of a solar park in Romania. Again, concerning alleged Chinese foreign subsidies. As the notifications were submitted on 4 March 2024, the Commission had to take a decision by August 2024 – within 110 working days from the submission date. However, the Commission closed its investigations on 7 June 2024, as both companies under scrutiny had withdrawn their bids.

Chinese wind turbine suppliers

Soon after on 9 April 2024, the Commission made use of the ex-officio investigation tool for the first time. It launched a new investigation into the granting of foreign subsidies to Chinese wind turbines manufacturers concerning wind park development projects in Spain, Greece, France, Romania and Bulgaria. The European wind turbine industry supports the investigation. In a public statement, they voiced concerns about Chinese competitors being able to offer much lower prices and more generous financing terms, which could disrupt fair competition. 

Dawn raid in the security equipment sector

Also in April 2024, the Commission carried out dawn raids in the security equipment sector at Nuctech's premises in Rotterdam and Warsaw. Nuctech is a Chinese supplier of container and luggage scanner equipment. The unannounced inspections were conducted together with national competition authorities. Senior EU officials allegedly stated that they have a strong case against Nuctech. However, the Commission has not yet announced the opening of an in-depth investigation into the existence of distortive foreign subsidies. Nuctech brought an action against the Commission in front of the EU General Court on 29 May 2024. The case number is T-284/24. Nuctech challenges the legitimacy of the Commission inspection decision and subsequent acts of investigation. The submitted pleas in law reveal that the court must, amongst others, rule on the territorial jurisdiction of Commission FSR enforcement. 

Takeover in the telecom sector

On 10 June 2024, the Commission opened an in-depth investigation into the notification of the acquisition of PPF Telecom Group B.V. (PPF) by the Emirates Telecommunications Group Company PJSC (e&). This is the first FSR investigation concerning a concentration, the telecommunications sector and, presumably, the first time the Commission targets foreign subsidies from a third country other than China. The Commission must take a decision by October 15. The investigation significantly delays the closing of the transaction – PPF previously announced it expected to close the transaction in Q1 of 2024.

Notifications: the status quo

The notification obligations under the FSR apply as of 12 October 2023. The Commission published statistics on the number of notifications received in the first 100 days of the entry into force of the notification obligations in January and February of 2024. In the first four months of application, the Commission reportedly received 21 notifications. If this trend continues, the total could reach approximately 60 notifications per year. However, the Commission has not published statistics since, leaving the current number of notifications unknown.

• Concentrations: the Commission issued a policy brief in February 2024 providing an overview of the concentration cases it dealt with or was dealing with at that time. Accordingly, the Commission entered into pre-notification talks in 53 cases and received 14 formal notifications, out of which 9 cases had been fully assessed. Interestingly, in one case, the notifying parties decided to abandon the contemplated transaction during the pre-notification phase. There were no cases in which the Commission found that sufficient indications of distortive foreign subsidies existed to open an in-depth investigation.
• Public procurement: the Commission in a news article on 19 January 2024 stated that it had received over 100 submissions – which includes both notifications and declarations that notification is not required. We estimate that this includes approximately 7 notifications, considering that the Commission reportedly received a total of 21 notifications, of which 14 concerned concentrations. As previously mentioned, the Commission opened in-depth investigations into three notifications. None of these investigations resulted in a final Commission decision on the existence of distortive foreign subsidies, as the companies under investigation in all three cases withdrew their bids before the closing of the investigation. 
  
  

Guidance: a notable absence

The first year of FSR enforcement provided minimal 'hard' guidance on the FSR's application. There have been no Commission enforcement decisions. However, the Commission did provide 'soft' guidance in the Questions and Answers on its website, which it updates regularly. New questions were added in July and November 2023, and in April 2024. The Commission's answers focus on the information requirements on turnover and foreign financial contributions in the submission of notifications under the FSR. However, the Q&A has so far offered no guidance on the actual test the Commission applies to determine whether foreign subsidies distort the internal market.

Looking ahead

The Commission's enforcement history reveals its focus on participation by foreign-owned entities particularly Chinese state-owned enterprises, in public procurement. This focus is a response to the growing protectionist sentiment within the EU. It addresses the concerns, particularly from Germany and France, about unfair competition from China for large industrial procurement contracts. The possibility of subsidised competition on the EU market by CRRC was a major concern following the Commission’s prohibition of the Siemens/Alstom merger in 2019. Therefore, it is both significant and symbolic that the Commission's first enforcement action targeted the participation in a public tender by a subsidiary of CRRC. 

Looking ahead, we predict the FSR will become a top priority for the Commission in the coming years, given the current geopolitical climate. It is noteworthy that the new Commission unit for the FSR enforcement includes senior officials which were formerly part of the Commission's State aid unit. Together with the in-depth investigations and dawn raid which have already taken place, this shows that the Commission is serious about enforcing the FSR. So far, we have only seen a glimpse of what could be on the horizon.